Tax-Equivalent Yield Calculator
Compare municipal bond yields to taxable bonds at your marginal tax rate. A 3% tax-free muni yield can be worth more than a 4% taxable yield — this calculator shows the real comparison.
Understanding Tax-Equivalent Yield
The formula is simple. Tax-equivalent yield = muni yield / (1 − marginal tax rate). A 3% muni at a 32% marginal rate equals 3% / (1 − 0.32) = 4.41% taxable equivalent. You’d need a taxable bond yielding 4.41% to match the after-tax return of that 3% muni.
Higher brackets benefit more. The tax-equivalent yield advantage increases with your marginal rate. A 3% muni is worth 3.33% to someone in the 10% bracket, but 5.17% to someone in the 42% combined bracket. Munis are generally most attractive for investors in the 32% bracket and above.
In-state vs. out-of-state. Municipal bonds from your home state are typically exempt from both federal and state income tax. Out-of-state munis are usually exempt from federal tax only (with exceptions like bonds from U.S. territories). The state tax exemption can add 3–13% to the effective yield advantage depending on your state.
AMT considerations. Some private activity municipal bonds are subject to the Alternative Minimum Tax (AMT). If you’re subject to AMT, the tax exemption may be partially or fully lost. General obligation and essential-purpose revenue bonds are typically AMT-free.
NIIT does not apply to munis. The 3.8% Net Investment Income Tax does not apply to tax-exempt municipal bond interest. This further widens the advantage for high-income investors whose taxable bond income would be subject to NIIT.
Credit risk and liquidity matter. Tax-equivalent yield is only one factor. Municipal bonds carry credit risk (though defaults are rare for general obligation bonds), and the secondary market can be less liquid than Treasuries or corporate bonds. Always compare risk-adjusted yields, not just nominal rates.